Ray Boulger's Blog

Budget Analysis

At the beginning of his speech the Chancellor said he is asking the Bank of England’s Financial Policy Committee (FPC) to be particularly vigilant in the light of current market turbulence. This message must increase the risk of the FPC introducing even stricter controls on mortgage lenders, either on residential, buy to let (BTL) mortgages or both.

The Chancellor originally told The Treasury Select Committee last summer that the would be handing powers to the FPC to control BTL lending, similar to those he has already given the committee on residential mortgages. The Budget would have been an ideal opportunity for him to confirm the passing on of these powers. The fact he didn’t suggests The Bank doesn’t want this additional responsibility quite yet.In theory the timing of this handing over of power should make little difference. The Bank of England is already tasked with advising the Chancellor if any restrictions should be imposed on BTL lending. Clearly in practice The Treasury and The Bank of England would consult privately before any recommendation was made public. It is inconceivable The Bank of England would go public with any recommendation that the Chancellor hadn‘t already accepted.

I suspect the reason for the delay in handing over powers is the lack of adequate, robust information on BTL lending. Put simply because nearly all BTL lending is not regulated by the FCA, the quality and quantity of data available is significantly less than on residential lending. Before deciding what action, if any to take, The Bank of England will want to be confident of the data it is using.

Should the FPC decide to tighten lending criteria on residential mortgages further it can’t realistically restrict loan to value (LTVs) because of the Help to Buy programme. This leaves the most obvious option as an intensification of the income multiple restriction. The current rule is that a maximum of 15% of lending can be in excess of 4.5 times income. Any change could reduce the 15% or the 4.5 times, or both.This current FPC rule conflicts with the FCA’s Mortgage Market Review, which more sensibly focuses on affordability, so also factoring in both expenditure and the length of the mortgage. Any further restriction from the FPC would inevitably inhibit the ability of some people to buy a property, including first time buyers.

3% stamp duty surchargeAlthough the Chancellor claimed he had listened to responses to the consultation document on the 3% stamp duty surcharge changes to the draft proposals only partially address one unfairness brought in by the new system and ignores all others.

Extending the time allowed to reclaim the 3% surcharge for someone buying a new main residence who already owns at least one other property on completion, but subsequently sells it (or them), to three years from the 18 months originally proposed will help a few people. However, as they will still initially have to find the 3% surcharge on the cost of their new main residence this will in most cases, increase the amount they need to borrow. Funding an extra 3% will push many purchasers into the next LTV bracket and as a result increase their mortgage rate.

Special purpose vehicles for BTL purchasesNot exempting larger investors from the surcharge, as originally proposed, will result in even more people using a Special Purpose Vehicle (SPV), such as a limited company, to purchase BTL properties. The fact that corporation tax is also being reduced to 17% adds a small additional benefit to using an SPV. The Treasury justifies not extending relief from the 3% surcharge to purchasers of a large number of properties by referring to Multiple Property Relief, which is an option available to people buying at least six properties in a linked transaction. However, this merely rectified unfairness in the previous system, under which portfolio buyers were discriminated against.

With a substantial increase in demand likely for BTL mortgages for SPVs more lenders are likely to enhance or widen their criteria, extending BTL lending to SPVs and Limited Liability Partnerships (LLPs). Although the underwriting and legal process for lending to an SPV is more complicated, justifying a higher fee, as lenders normally require a personal guarantee from the director(s), the risk of delinquency is similar, which suggests it is difficult to justify a higher rate than for lending in a personal name.

The Chancellor’s continuing attacks on BTL, plus the large increase in ISA limits, suggest the Chancellor is keen to divert savings/investments away from residential property and into safer havens with less potential for capital gain.

Capital GainsThe substantial cuts in Capital Gains Tax on everything except residential property (BTL and second homes) is further evidence that the Chancellor doesn’t expect the government to be able to facilitate sufficient house building to meet demand in the foreseeable future. However, this could easily backfire, as it is likely to encourage BTL investors who were thinking of selling, perhaps as a result of the income tax changes, to wait in the hope that CGT rates are brought in line, thus reducing the supply of property on the market.

New Lifetime ISAThe new Lifetime ISA (LISA), due to start in April 2017, will enable people aged under 40 to save for a deposit on their first home to achieve their goal significantly quicker than with the Help to Buy ISA. Both offer the 25% bonus but LISA allows up to £4,000 a year to be saved, compared to £2,400 after the first year with the Help to Buy ISA.

Although a LISA can only been taken out by those under 40, savings can continue to be made and will attract the 25% bonus until age 50 and there is no age limit on when the first time buyer can buy a property. Whereas the maximum amount in the Help to Buy ISA which can qualify for the 25% Government bonus is £12,000, the bonus limits for LISA are much higher. If you were to open a Lifetime ISA on your 18th birthday, you'd be able to get a maximum £32,000 government bonus by the time you're 50, assuming you save the maximum £4,000 per year, and future governments don't change the rules.LISA can be used by first time buyers to buy a property anywhere in the UK up to £450,000, but with the Help to Buy ISA this maximum only applies in London, with the limit elsewhere at £250,000.In the medium term LISA offers a strong incentive to save a deposit and so should help address the steady decline, since 2003, of the proportion of the population who are owner occupiers.

Commercial stamp dutyThe changes in commercial property stamp duty rates will help many purchasers of commercial property. These rates will also apply to mixed use properties, such as a shop with a flat above, and properties in this category are also exempt from the 3% surcharge.

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The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.

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